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Notes
See Lipschitz et al. (2005).
Note that, since the Asian crisis, much of the discussion about the relative merits of exchange regimes has focused on the problem that implicit exchange rate guarantees encourage foreign exchange exposure; the resulting balance sheet vulnerabilities can easily produce a “fear-of-floating” syndrome, delaying adjustment and exacerbating the eventual crisis. A free floating regime has the major advantage of discouraging excessive foreign exchange exposure.
An incidental quibble: Issing mentions the conventional view that membership in a currency union makes sense if cycles are positively and closely correlated. This is true if the shocks emanate from the demand side, but not necessarily so if they come from the real economy — e.g., from productivity — as is presaged in the Mundell (1973) article cited. Thus, if the economies are characterized by Kydland-type real business cycle models, negative correlations may help reduce the variance of consumption in the currency union as a whole. (See, for example, Guajardo 2005).
Perhaps the global price for raw unskilled labor is being set in China. Interesting comparative wage costs in manufacturing are provided by Banister (2004) for the Bureau of Labor Statistics of the US Department of Labor. For 2002 in US dollars, hourly wage costs were $24.20 in Germany, $21.40 in the US, $18.25 in the UK, $3.92 in Hungary, $3.83 in the Czech Republic, and $0.63 in China. Of course, the more relevant comparison is in unit labor costs — i.e., productivity-adjusted wage costs.
References
Banister J (2004) Study on China for the Bureau of Labor Statistics (BLS), US Department of Labor, December
Blanchard JB, Katz L (1992) Regional Evolutions, Brookings Papers on Economic Activity (3):369–402
Guajardo JC (2005) Business Cycles in Small Developed Economies: The Role of Terms of Trade and Foreign Interest Rate Shocks, unpublished, IMF Institute September
Helpman E (2005) Trade, FDI, and the Organization of Firms, unpublished, September 26 (See IMF Institute, Joint Vienna Institute (JVI), and National Bank of Poland, papers for the Conference on Labor and Capital Flows in Europe Following Enlargement, Warsaw, Poland, January 30-31, 2006. Papers, presentations, and the program are available on the websites of the IMF and the JVI.)
Lipschitz L, Lane T, Mourmouras A (2005) Real convergence, capital flows, and monetary policy: notes on the European transition countries, in S Schadler (ed.) Euro Adoption in Central and Eastern Europe: Opportunities and Challenges, IMF
Marin D (2005) A new international division of labor in Europe: outsourcing and offshoring to Eastern Europe, University of Munich, September (See IMF Institute, Joint Vienna Institute (JVI), and National Bank of Poland, papers for the Conference on Labor and Capital Flows in Europe Following Enlargement, Warsaw, Poland, January 30-31, 2006. Papers, presentations, and the program are available on the websites of the IMF Institute and the JVI.)
Mundell RA (1973) Uncommon arguments for common currencies in the economics of common currencies: proceedings of the Madrid conference on optimum currency areas, in HG Johnson and AK Swoboda (London 1973), pp 501–519
Acknowledgements
The author thanks, without implication, Jörg Decressin, Hamid Faruqee and Peter Isard for helpful comments. The views expressed are those of the author and should not be construed as the views of the IMF.
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Lipschitz, L. Comments on O. Issing: “Europe’s hard fix: the Euro area”. IEEP 3, 197–201 (2006). https://doi.org/10.1007/s10368-006-0076-y
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DOI: https://doi.org/10.1007/s10368-006-0076-y